Q&A: The Great Pharmaceutical Garage Sale of 2014

Over the past month, several large drug makers have reportedly begun considering the sale of some of their older medicines. Among them are Merck, Sanofi, GlaxoSmithKline and Abbott Laboratories. And Pfizer continues to look at breaking up its pharmaceutical business into separate entities, including a unit for older drugs, or ‘established products,’ that might eventually be spun off.

Which drugs may be sold is not clear, but the Zocor cholesterol pill or Propecia baldness treatment have been named as possible candidates. The idea is to generate cash by unloading drugs offering diminishing returns and use the money to develop products that would, presumably, generate higher margins.

But is this notion a viable? We spoke with Richard Evans, a healthcare analyst at Sector & Sovereign Research. This is an excerpt.

Does it make sense to sell these products?
The short answer is that I’m not sure. With Pfizer, the only reason that might it make sense is if you could get more value for these separate pieces than for the whole… There is also the question of managing a hand off. When mature products are starting to decline, what do you do? Does Pfizer later try to sell older products one at a time? The problem of having mature products becomes a recurring problem. You can shed older assets once and be done with it, but what is the solution for the future?

Where this falls apart is if you take the innovative core and cleave off the established products, you’ll get more reaction in the stock if you launch a good product. But you’ll also get more reaction if you don’t launch a good product. So you’ve made this surviving entity much more volatile by virtue of product flow and these companies are not real good at creating consistent product flow… Unless these companies fundamentally change their R&D productivity, you’re simply creating a high-risk stock that doesn’t have enough growth for the level of risk being assumed…

Why is there all this supposed interest in selling off older products now?
There’s a flavor-of-the-month dynamic here. Pfizer has been talking about this for some time and it’s received a positive buzz. So it would not be unusual for the [investment] banks to pitch these types of transactions [to drug makers] and for managements to provide favorable commentary [about the reasons for interest in a sale]. But the business, financial and strategic logic is no different today than it ever has been. The basic reason you might [look to sell older medicines] has never really changed, but maybe someone is now willing to pay you more than what it’s worth to you. Maybe the company decides these are less efficient products to make or they are geographically inconvenient to your strategy. But I don’t think the logic is any more compelling than it ever was.

So to what extent should we expect to see a lot of buyers emerge? And Is Valeant Pharmaceuticals an obvious possibility?
It really depends on the products. It’s a big game of cross matching. In theory, if buyers and sellers exist, everything has some value. Sure, there will be people who will bid for these things. The question is will they be worth more to the buyer than to the seller? Or will the buyer cut prices and push into new geographies or just try to buy cheap, which tends not to work. There are a lot of companies out there that as not as big as Valeant but operate on the same business plan. So there are enough around to take a look. After all, there are billions of dollars of assets, in theory, that are coming on the market… But I don’t believe there is anything fundamentally that should make people interested more than before.

With that in mind, does it make sense to sell older products that are popular in emerging markets?
Emerging markets have been a bigger share of total revenue over time and most products are sold to middle or upper class consumers who pay cash for off-patent products. These people want to be assured of quality to make sure [the drugs are] manufactured correctly. By selling off established products, presumably a lot of the emerging market demand would be sold as well. This raises a strategic question – is that something I want to do? As an innovative company, do I want to step off this path? To the extent established products are providing access to distributors, why would you not want to keep that?

Comments (1 of 1)

It's a thoughtful analysis of an interesting question, but it seems to tilt heavily to the revenue side. I would think at least part of the justification for selling off older meds would be that while revenues decline, liabilities don't decline as quickly--I'm thinking particularly about Wyeth v. Levine here, a bitter and ugly fight over a non-exclusive product.